Macroeconomics: National Income

By

Dr. Mahendra Parihar

Associate Professor,
MPSTME, NMIMS
Mumbai
 NATIONAL INCOME
National income is defined as the money value of all the final goods and
services produced in an economy during an accounting period of time,
generally one year.

Concepts of National Income

• Gross Domestic Product (GDP)
• Gross National Product (GNP)
• Net Domestic Product (NDP)
• Net National Product (NNP)
• Per Capita Income
 GROSS DOMESTIC PRODUCT

• Gross Domestic Product (GDP): GDP is the sum of money values of all final goods
and services produced within the domestic territories of a country during an accounting
year.
GDP= C+I+G+(X-M)

• GDP at market price: includes the final value of goods and services also includes
indirect taxes and excludes the subsidies given by the government.

• GDP at factor cost is the money value of final goods and services based on the cost
involved in the process of production.
Gross Domestic Product at factor cost
= GDP at Market Prices –Indirect Taxes+ Subsidies
 GROSS NATIONAL PRODUCT

• Gross National Product (GNP): GNP is the aggregate final output of citizens and
businesses of an economy in a year.

• GNP may be defined as the sum of Gross Domestic Product and Net Factor
Income from Abroad (NFIA).
GNP = GDP + NFIA
GNP = C+I+G+(X-M)+NFIA

• Net Factor Income from Abroad: difference between income received from
abroad for rendering factor services and income paid towards services rendered by
foreign nationals in the domestic territory of a country.
 NET DOMESTIC PRODUCT AND NET NATIONAL PRODUCT

• Net Domestic Product

= GDP-Depreciation

• Net National Product (NNP)

= GDP–Depreciation +NFIA
Or =GNP–Depreciation

• Thus NNP is the actual addition to a year’s wealth and is the sum of consumption expenditure,
government expenditure, net foreign expenditure, and investment, less depreciation, plus net
income earned from abroad.
= C+I+G+(X–M)–Depreciation + NFIA
 REAL AND NOMINAL
NATIONAL INCOME
• National income estimated at the prevailing prices, is called national
income at current prices or Nominal National Income, or Money
National Income or national income at current prices.
• National income measured on the basis of some fixed price, say price
prevailing at a particular point of time, or by taking a base year, is
known as national income at constant prices, or Real National
Income or national income at constant prices.

Nominal GDP
Real GDP =
GDP deflator

•GDP deflator is the ratio of nominal GDP in a year to real GDP of that year
•GDP deflator measures the change in prices between the base year and the current
year.
 PER CAPITA INCOME AND
PERSONAL INCOME
• Per capita income is the average income of the people of
a country in a particular year.
National Income
Per Capita Income =
Total Population

• Personal income is the total income received by the

individuals of a country from all sources before direct taxes
in one year.
• Personal Disposable Income is the income which can be
spent on consumption by individuals and families.
Personal Disposable Income = Personal Income – Personal Taxes
 METHODS OF MEASURING
NATIONAL INCOME
In equilibrium: Output=Income=expenditure
Hence there are three approaches to the measurement of GDP:

• Product (or Output) Method: National Income by Industry of Origin

• Income Method or National Income by Distributive Shares

• Expenditure Method
 INCOME METHOD

• The net income received by all citizens of a country in a particular year,

i.e. total of net rents, net wages, net interest and net profits. (GDP at
factor cost).
• It is the income earned by the factors of production of a country.
• Add the money sent by the citizens of the nation from abroad and
deduct the payments made to foreign nationals (individuals and firms)
(GNP at factor cost) or Gross National Income (GNI).
Process:
• Economy is divided on basis of income groups, such as
wage/salary earners, rent earners, profit earners etc.
• Income of all the gruops is added, including income from abroad
and undistributed profits.
• The income earned by foreigners and transfer payments made in
the year are subtracted.
GNI = Rent + Wage + Interest +Profit + Net Income from Abroad-
Transfer payments
 LIMITATIONS OF INCOME METHOD

• Exclusion of non monetary income: Ignores the non-

monetized section of economic activities.
• Economic activities that contribute to national income, but due to
their non monetary nature, they go unrecorded. For e.g. a farmer
and family working in their own field.

• Exclusion of Non Marketed Services: People undertake

a particular activity that are difficult to ascertain in money
value. E.g. mother’s services to the family.
 EXPENDITURE METHOD OF MEASURING
NATIONAL INCOME

• The total expenditure incurred by the society in a particular

year is added together to get that year’s national income.
• Components of Expenditure:
• personal consumption expenditure
• net domestic investment
• government expenditure on goods and services, and
• net foreign investment
Limitations
• Ignores Barter System
• Ignores Own Consumption
• Affected by Inflation
 PRODUCT (OR OUTPUT) METHOD

• The market value of all the goods and services produced in the
country by all the firms across all industries are added up
together.
• Process
• The economy is divided on basis of industries, such as agriculture,
fishing, mining and quarrying, large scale manufacturing, small scale
manufacturing, electricity, gas, etc.
• The physical units of output are interpreted in money terms
• The total values added up. (GDP at market price)
• The indirect taxes are subtracted and the subsidies are added. (GDP at
factor cost)
• Net value is calculated by subtracting depreciation from the total value
(NDP at factor cost).
LIMITATIONS OF PRODUCT
METHOD
• Problem of Double Counting:
• unclear distinction between a final and an intermediate product.
• Not Applicable to Tertiary Sector:
• This method is useful only when output can be measured in
physical terms
• Exclusion of Non Marketed Products
• E.g. outcome of hobby or self consumption
• Self Consumption of Output
• Producer may consume a part of his production.
USES OF NATIONAL INCOME DATA

• Standard of Living Comparison

• Economic Performance Over Time
• National Planning
• Sectoral Contribution
• Economic Policy
• National Expenditure
• Public Sector
• Distribution of Income
 DIFFICULTIES IN MEASUREMENT OF
NATIONAL INCOME

• Non monetized transactions: Exchange of goods and services which have no

monetary payments, like services rendered out of love, courtesy or kindness are
difficult to include in the computation of national income.
• Unorganized sector: Contribution of unorganized sector are unrecorded. It is
very difficult to identify income of those who do not pay income tax.
• Multiple sources of earnings/Multi-occupations: Part time activity goes
unrecognized and such income is not included in national income.
• Categorization of goods and services/Double Counting: In many cases
categorization of goods and services as intermediate and final product is not very
clear.
• Inadequate data/False Information: Lack of adequate and reliable data is a
major hurdle to the measurement of national income of underdeveloped countries.
• Problem of expertise.
• Problem of illiteracy.